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Can anyone explain to me in practical terms the notion of 'Carry Trade' when discussing fixed income investment strategies ?Thanks alot Bond

Bond,Carry is generally defined as the net current cash inflow or outflow associated with a fixed income trade. Positive carry means you are net receiving cash and negative carry the opposite. As a simple example, suppose you buy a bond with a coupon of 6% and finance the purchase using overnight borrowing at 1.25% (more likely you would use repo, but never mind that). This trade would have positive carry of 475 basis points, since the bond accrues coupon income at 6% whereas the financing is only 1.25%. Note that the concept of carry only considers current income, whereas trade profitability obviously also depends on future capital values (i.e. what you can sell the bond for later).Hope this helps

<<<hi david,thanks for your explanation. but one silly question, why do we assume financing of the bond.when carry is involved, do we mean institutional transactions?thanks QuoteOriginally posted by: DavidJNBond,Carry is generally defined as the net current cash inflow or outflow associated with a fixed income trade. Positive carry means you are net receiving cash and negative carry the opposite. As a simple example, suppose you buy a bond with a coupon of 6% and finance the purchase using overnight borrowing at 1.25% (more likely you would use repo, but never mind that). This trade would have positive carry of 475 basis points, since the bond accrues coupon income at 6% whereas the financing is only 1.25%. Note that the concept of carry only considers current income, whereas trade profitability obviously also depends on future capital values (i.e. what you can sell the bond for later).Hope this helps

Hi,In terms of interest rate swaps which are a kind of variation in fixed income, when rates are expected to go up, a person who does a fixed pay, floating receive trade has an initial negative carry because the fixed pay leg factors in long term interest rates.Similarly the counterparty would have a positive carry.thanks.

In 1992 and 1993 the Us long term bond market went up 20%, many hedge funds took this opportunity, borrowed at cheap rates and invested in these notes, the negative controindication was that many little private investors followed big market leaders pushing spreads over and over again. Another definition for carry trade regards borrowing of cash in a foreign currency in countries with lower interest rates and purchasing equal amount in domestic govt.bonds.An example are yen carry trades: borrowing in japan yen and investing in US T-bonds, good strategy excepting exchange rate risk.